Before you decide what to invest in, it is important to decide how you want to invest.

Perhaps the cheapest way to invest, if you have the time and expertise, is with an online discount brokerage firm. You can pay just a few dollars per transaction, depending on the number of shares you purchase. Plus, you can save several thousand dollars a year in annual fees.

By investing in individual securities, you also can make some tax-smart moves. You can offset gains on some investments with losses on others. You can sell bonds at a loss and invest in a similar bond at a similar price and write off your losses.

The drawbacks: You have to know what you're doing. You must keep a close eye on your investments and do your own investment research. You need to set some rules in advance on when you want to buy and when you want to sell a stock or bond. You don't want to go on vacation and forget about your investments.

Perhaps an easier do-it-yourself route is to invest in mutual funds. Mutual funds invest in a pool of securities, but they're professionally managed. You generally can invest as little as $1,000 into a mutual fund. With a mutual fund, an investment pro does the investing for you at a relatively low cost. The pro buys and sells based on guidelines highlighted in the funds prospectus.

In addition, mutual funds are required to adhere to uniform performance reporting standards, so it's easy to check performance. Just look in the newspaper or go to Morningstar.com to learn the total return on your mutual fund.

The drawbacks: You own a one-size-fits-all investment. On the other hand, if you invest yourself or hire an individual money manager, you have greater freedom to tailor your investments to your investment goals. In addition, mutual funds distribute capital gains on profitable investment trades at year end. So you get hit with extra taxes.

A more customized option is to hire a money manager in a separately managed account. You pay an investment pro an annual fee of about 1 percent to 2 percent to put together a series of investments for you. You generally don't pay brokerage commissions with these types of accounts. The money manager buys individual securities based on your goals. Managers also can make tax-smart moves to reduce your tax bite.

The drawbacks: You could hire a poor money manager. In that case, your investment could suffer or taxes might not be considered. You could hire the wrong type of money manager, and not meet your investment goals. A careless money manager might just park your money in a brokerage firm's privately managed accounts and not provide any more service.

Unlike with mutual funds, there are no uniform standards on how money managers must report performance. So it's easy to get misled. You certainly don't want to rely on a manager's average portfolio performance numbers, based on all his or her clients. You also want to make certain a money manager is careful to reexamine your investment situation periodically, considering performance and taxes.

Another option still is to do business with a good old fashioned stockbroker. A good broker can help you make investment decisions as well as limit your investment taxes just like an individual money manager. A broker should provide you with research reports published by the brokerage firm.

The drawbacks: When you invest with a broker you pay commissions when you buy and sell securities. So you must be sure the broker is working in your best interest. Full-service brokerage firm commissions typically are much higher than commissions charged by online discount brokerage firms.

You might also hire a financial planner. Financial planners look at all aspects of your finances. They develop a financial plan that includes investments, insurance, tax and estate planning. Typically, financial planners charge an annual fee and invest your money in different types of mutual funds. They may also charge an hourly or flat fee do a financial plan.

The drawbacks: Financial planners may charge high fees for financial advice. As with a money manager, it's possible to choose a poor financial planner.

Money managers and financial planners may have different degrees of training and experience. So it is important to examine their backgrounds carefully.

#

Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).